The purpose of the unbundling in its current form weighs heavily on reforming the electricity market rather than saving and creating a sustainable or viable Eskom. Photo: Reuters
The purpose of the unbundling in its current form weighs heavily on reforming the electricity market rather than saving and creating a sustainable or viable Eskom. Photo: Reuters

Unbundling process distracts Eskom from immediate challenges

By Bheki Mfeka Time of article published Jun 7, 2020

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JOHANNESBURG – The Minister of Public Enterprises, Pravin Gordhan, is correct when he says Eskom unbundling will be a complex and sensitive process. The complexity in my view stems from the purpose and approach to unbundling Eskom, which is not properly conceived since the immediate priority for sustainability of Eskom should not be unbundling.

Unbundling without policy could create serious risks for Eskom and a distraction to the burning platforms. What Andre du Ruyter, chief executive of Eskom calls first phase of the unbundling process, is merely cosmetic and does not spell any departure from what Eskom has been, instead if rolled-out without policy and regulatory reforms it may, unnecessarily, increase costs and governance burden.

The purpose of the unbundling in its current form weighs heavily on reforming the electricity market rather than saving and creating a sustainable or viable Eskom that keeps the lights on and affordable. The reform of the market is the sole responsibility of the policy department of energy and the regulator, Nersa.

When President Cyril Ramaphosa announced unbundling of Eskom in his State of the Nation Address in February 2019 he said: “To bring credibility to the turnaround and to position South Africa’s power sector for the future, we shall immediately embark on a process of establishing three separate entities – Generation, Transmission and Distribution – under ESKOM Holdings. This will ensure that we isolate cost and give responsibility to each appropriate entity.

“This will also enable Eskom to be able to raise funding for its various operations much easily from funders and the market. Of particular and immediate importance is the entity to manage an independent state-owned transmission grid combined with the systems operator and power planning, procurement and buying functions. It is imperative that we undertake these measures without delay to stabilize Eskom’s finances, ensure security of electricity supply, and establish the basis for long-term sustainability.”

This statement left many, including myself, confused as there was no detail as to the clear purpose and path of the unbundling and how it would save Eskom. After the release of Public Enterprises’ paper titled Roadmap For Eskom In A Reformed Electricity Supply Industry in October 2019, it became clear that the purpose of the unbundling process was more about electricity market reforms than with the immediate priority of internal reforms or turnaround strategy to improve viability of Eskom in the short to medium term.

If Eskom is to be viable in the short to medium term it needs to deal with its debt including Municipal debt, manage cost-overruns in its new built infrastructure, and coal and IPPs price, reduce a bloated executive structure, and deal with corruption which has less to do with market structure.

Giving the responsibility for leading the process of electricity market reforms, potentially undermines policy role of the department of energy and the regulator Nersa. Andre du Ruyter has correctly consistently expressed the view that unbundling should not be a priority for Eskom at this stage.

How Eskom is expected to immediately cannibalize itself by creating an “independent” yet subsidiarized transmission company that opens itself up for competition and eventual reduction of revenues and demise of its generation capacity does not make logical business sense, instead it sounds like more of a political instruction rather than a strategy to save Eskom.

The loud headlines “Eskom informs lawmakers it will not meet DPE's unbundling timeline” is reflective of the genesis and the conflict of interest. It would seem a creation of an independent transmission company within Eskom holding is a smokescreen or short-cut to the reintroduction of the erstwhile Independent System and Market Operator (ISMO) bill which was terminated by government a while back.

Of which in itself is not misguided reintroduction idea except it detracts Eskom leadership from immediate priorities and fall outside Eskom’s competence or core-business. The leadership of Eskom’s main priority must be to keep the lights on by keeping Eskom alive in the short to medium term.

The problem of Eskom as a “too big to fail”, and the systematic market issues are not for Eskom to focus on. Eskom should be made aware of the proposals for market reforms, and at the point of policy and regulatory decisions and appropriate legislation, Eskom will restructure itself accordingly at that time. I must hasten to say the developmental role of Eskom and affordability of electricity will be at the crux of the debate on energy market reforms as has been.

This will mean, in the absence of a balanced model of electricity market reforms that safe-guards security of supply, and moderate pricing for developmental purposes, a radical opening of the market will be highly contested. This is where the policy maker and regulator need to play their role. Knowing that the average time to make legislation in South Africa is more or less five years and with the normal potential litigation and resistance, this can drag on for years if not properly conceived, which can spell a second version of ISMO bill saga.

Dr Bheki Mfeka, is the Economic Advisor and Strategist at SE Advisory; and former Economic Advisor to the Presidency. | Twitter: @bhekimfeka | Website: www.seadvisory.co.za | Email: [email protected]

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